Question

Compensating balance versus discount loan Weathers Catering Supply, Inc., needs to borrow $153,000 for 6 months. State Bank has offered to lend the funds at an annual rate of 8.6% subject to a 9.5% compensating balance. (Note: Weathers currently maintains $0 on deposit in State Bank.) Frost Finance Co. has offered to lend the funds at an annual rate of 8.6% with discount-loan terms. The principal of both loans would be payable at maturity as a single sum.

a. Calculate the semi-annual rate on each loan.

b. Calculate the effective annual rate of interest on each loan.

c. What could Weathers do that would reduce the effective annual rate on the State Bank loan?

Answer #1

Caylor Inc. needs to borrow $300,000 for the next 6 months. The
company has a line of credit with a bank that allows the company to
borrow funds with a 10% interest rate subject to a 25% of loan
compensating balance. Currently, Caylor Inc. has no funds on
deposit with the bank and will need the loan to cover the
compensating balance as well as their other financing needs. How
much will Caylor Inc. need to borrow?
a. $330,000 b....

Neveready Flashlights, Inc. needs $410,000 to take a cash
discount of 2/10, net 60. A banker will loan the money for 50 days
at an interest cost of $6,600.
a.
What is the annual rate on the bank loan? (Use 365 days
in a year. Do not round intermediate calculations. Round the final
answer to 2 decimal places.)
Annual rate
%
b.
How much would it cost (in percentage terms) if the firm did not
take the cash discount,...

You plan to borrow $30,000 from the bank to pay for inventories
for a gift shop you have just opened. The bank offers to lend you
the money at 10 percent annual interest for the 6 months the funds
will be needed.
a. Calculate the effective rate of interest on the loan.
b. In addition, the bank requires you to maintain a
compensating balance of 15 percent in the bank. Because you are
just opening your business, you do not...

Harper Corporation needs €750,000 to take a cash discount of
5/15, net 40. A banker will loan the money for 25 days at an
interest cost of €19,100. Assume a 360-day year for your
calculations.
Instructions:
What is the effective rate on the bank loan? (5 points)
How much would it cost (in percentage terms) if Harper did not
take the cash discount, but paid the bill in 40 days instead of 15
days? (5 points)
Should Harper borrow the...

Harper Corporation needs €750,000 to take a cash discount of
5/15, net 40. A banker will loan the money for 25 days at an
interest cost of €19,100. Assume a 360-day year for your
calculations.
Instructions:
What is the effective rate on the bank loan? (5 points)
How much would it cost (in percentage terms) if Harper did not
take the cash discount, but paid the bill in 40 days instead of 15
days? (5 points)
Should Harper borrow the...

Neveready Flashlights Inc. needs $340,000 to take a cash
discount of 3/17, net 72. A banker will loan the money for 55 days
at an interest cost of $10,400.
a. What is the effective rate on the bank loan? (Use a 360-day
year. Do not round intermediate calculations. Input your answer as
a percent rounded to 2 decimal places.)
Effective rate of interest:
b. How much would it cost (in percentage terms) if the firm did
not take the cash...

Bernhard is CFO of Langer, Inc. and will be borrowing $800,000
for one year from the Living Well Bank. The bank will discount the
loan and require a 15% compensating balance. Langer Inc. has been
offered a nominal interest rate of 9.50%. What is the firm's
effective annual rate of interest for this loan?
Select one:
A. 9.50%
B. 10.50%
C. 11.18%
D. 12.58%
Hideki is the CFO of Matsuyama Inc. and is considering a loan.
The loan is a...

16
Neveready Flashlights Inc. needs $345,000 to take a cash
discount of 3/13, net 73. A banker will loan the money for 60 days
at an interest cost of $12,300.
a. What is the effective rate on the bank loan?
(Use a 360-day year. Do not round intermediate
calculations. Input your answer as a percent rounded to 2 decimal
places.)
b. How much would it cost (in percentage terms) if
the firm did not take the cash discount but...

(Cost of short-term financing) The R. Morin Construction
Company needs to borrow $80 comma 000 to help finance the cost of
a new $112 comma 000 hydraulic crane used in the firm's
commercial construction business. The crane will pay for itself in
1 year, and the firm is considering the following alternatives for
financing its purchase: Alternative Along dashThe firm's bank has
agreed to lend the $80 comma 000 at a rate of 14 percent. Interest
would be discounted, and...

?You plan to borrow ?$50,000 from the bank to pay for
inventories for a gift shop you have just opened. The bank offers
to lend you the money at 11 percent annual interest for the 9
months the funds will be needed? (assume a? 360-day year).
a.??Calculate the annualized rate of interest on the loan.
b.??In? addition, the bank requires you to maintain a 16 percent
compensating balance in the bank. Because you are just opening
your? business, you do...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 13 minutes ago

asked 13 minutes ago

asked 16 minutes ago

asked 31 minutes ago

asked 32 minutes ago

asked 46 minutes ago

asked 46 minutes ago

asked 55 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago